Mexico: Get Ready for Supersized Growth, Barclays Says

By Ben Levisohn

Mexico is supercharging its economy, and a little scandal is unlikely to derail its momentum, Barclays says.

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In a report released yesterday, Barclays’ Marco Oviedo says that Mexico’s economy could grow at a much faster path than had been achievable in the past, thanks to the nation’s reform agenda. He writes:

As the structural reform agenda is being pushed rapidly, the positive effects could start to add up. In an optimistic scenario, the estimated effects from the reforms in growth mean that the economy should display strong rates in the medium term: 0.3-0.7% additional growth from the labor reform, 1.5% from a successful energy reform and additional 0.1% from higher investments in the telecommunications sector. Thus, if the economy’s potential growth is in fact closer to 4%, the Mexican economy could reach 6% annual growth on a sustainable manner in the following years. Moreover, even if potential growth is rather lower, 5% y/y could be reachable, which is still a positive outlook.

President Peña Nieto is being perceived as a very efficient political coordinator, even by
the opposition…One key elements of his main strategy is to negotiate the terms of the structural reforms within the Pacto por Mexico…The agreement includes all the initiatives that each party would push in their own political agendas.

At the same time, the most radical politician in the PRD party quit to start his own part.

This has allowed the PRD to move away from more extreme positions, and it can gain electoral support by being perceived as a more moderate party that is willing to discuss issues to which it has been usually opposed on a systemic manner, such as private participation in the energy sector…It is in the best interest of the PRD to succeed with this alliance.

Finaly, the PAN party is reeling from its election loss.

Many members have resigned their affiliation, and its leadership has become weaker, suffering internal disputes. Working along with the government could help the party to reposition itself among voters as a responsible opposition.

And with PAN weakened, it’s in the ruling party’s interest to ensure that elections come off with as little corruption as possible, Oviedo says.

But will they follow through? So far Mexico’s politicians have been willing to walk their talk by targeting telecom monopolies America Movil (AMX) and Grupo Televisa (TV). The key will be reform of the oil sector, however.

A more flexible and open energy sector, along with better regulation, should boost investment and oil production. In addition, energy prices converging to those in the US economy could provide higher competitiveness to the manufacturing sector…We believe that a reform that solves the risk-sharing issues between the government and the private sector could increase investment additional USD$13bn per year, reaching an average investment in the sector of 3.2% of GDP during 2014-30. We estimate that this would have a sizable effect on potential growth, as it could add 1.2% to potential expansion of the economy.

Without energy reforms, however, all bets are off. “If we don’t see energy reform that leads to higher production and lower energy prices, you can forget about this,” Oviedo said in a phone interview today.

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